After Makena: Could a Risk Corridors Approach Balance Incentives and Access?

A form of progesterone known as 17P was used for years to reduce the risk of preterm birth. . . Because no companies marketed the drug, women obtained it cheaply from “compounding” pharmacies, which produced individual batches for them [at about $20 each]. Doctors and regulators had long worried about the purity and consistency of the drug and were pleased when KV won FDA’s imprimatur for a well-studied version, which the company is selling as Makena.

The list price for the drug, Makena, turned out to be a stunning $1,500 per dose. That’s for a drug that must be injected every week for about 20 weeks, meaning it will cost about $30,000 per at-risk pregnancy. . . . The approval of Makena gave the company seven years of exclusive rights, and KV immediately fired off letters to compounding pharmacies, warning that they could no longer sell their versions of drug.

A day after Stein’s article appeared, the FDA made it clear that it “does not intend to take enforcement action against pharmacies that compound” 17P, “in order to support access to this important drug, at this time and under this unique situation.”

Compounding pharmacists had already averred that “many of [KV’s] assertions that the compounding of an FDA approved product is prohibited are not supported by the legal citations it references.” Though the FDA’s letter preserves access to 17P for now, that access could be revoked at any time. As the FDA states on its website:

FDA understands that the manufacturer of Makena, KV Pharmaceuticals, has sent letters to pharmacists indicating that FDA will no longer exercise enforcement discretion with regard to compounded versions of Makena. This is not correct. In order to support access to this important drug, at this time and under this unique situation, FDA does not intend to take enforcement action against pharmacies that compound hydroxyprogesterone caproate based on a valid prescription for an individually identified patient unless the compounded products are unsafe, of substandard quality, or are not being compounded in accordance with appropriate standards for compounding sterile products. As always, FDA may at any time revisit a decision to exercise enforcement discretion.

Moreover, the problem persists for at least one other drug, colchicine. As Arthur Allen explains at Slate,

The colchicine and [17P] stories have their roots in the FDA’s historically complex relationship with the drug industry. Since 1962, the agency has required that all new drugs be proven safe and efficacious before hitting the market. Many drugs marketed before 1962, however, remain on sale without having been formally approved by the FDA and are technically illegal. In 2006, the FDA launched the Unapproved Drugs Initiative, aimed at getting rid of as many of these drugs as possible. . . .

The FDA campaign has two approaches. In some cases, the agency simply warns companies to stop producing and shipping unlicensed drugs by a given date. In other cases the FDA warns a group of companies producing a particular class of drug, notifying them that it plans to crack down on their unapproved substances. The idea here is to give the companies an opportunity to submit their drugs to the rigorous testing required for FDA approval. This is what happened with . . . at least 86 newly approved drugs. The problem is that after submitting such drugs to expensive testing, drug makers typically jack up the prices, in a position to do so under congressional patent incentives aimed at producing innovative drug research. The FDA has no say in how a drug is priced.

As the Post notes, KV says it “is spending more than $200 million to develop the drug and conduct follow-up studies that the Food and Drug Administration demands.” Had it kept its pricing power, it was estimated that Makena would cost the US health care system $4 billion per year. Assuming that 3/4 of that would be revenue to Makena, and it lasted for the full 7 years of exclusivity, that would be a $21 billion return on a $0.2 billion investment. That seems excessive, especially given that KV didn’t develop the drug. On the other hand, if the Makena price were to be reduced one hundredfold, that’s a $0.21 billion return on a $0.2 billion investment. Unless we hit some serious deflation, that doesn’t cover the time value of the money invested in studies and development.

Are there any better models here? Stein’s story says that “experts said the FTC could sue KV if it concludes the company is illegally impairing competition,” but I don’t see the theory there. The FTC has lamented post-merger price hikes for life sustaining drugs (see FTC v. Lundbeck), but has precious little authority over price hikes here. Perhaps liberal constitutional law professors could fuse the “medical self-defense” theory of Eugene Volokh with the expansive Yoo/Vermeule/Posner theories of executive power, and find inherent executive authority here to save preemies? Probably not; the current Supreme Court is only receptive to creative con law from one side of the political spectrum.

Another idea is for legislation to create “risk corridors” for researchers who engage in the FDA’s Unapproved Drugs program, as CMS has for prescription drug insurance plans in Medicare Part D. As Kip Piper explains,

Using a system of risk corridors that compares actual incurred drug benefit costs to estimated costs submitted in bids, Medicare limits the profits and losses of Part D drug plans. Specifically, if a Medicare drug plan’s actual benefit costs exceed expected (bid) levels by a sufficient degree, the plan will receive an additional federal payment to cover a portion of the loss. However, if a drug plan’s actual spending falls sufficiently below projections, the plan must share some of the profit with the feds. Risk corridors apply to actual and expected drug benefits costs but exclude plan administrative costs and federal reinsurance payments.

Unfortunately, estimates of the value of testing unapproved drugs vary widely. The FDA’s director of the FDA’s Office of New Drugs and Labeling Compliance insists on the importance of these programs. But, looking specifically at colchicine, an Austin rheumatologist said “Doing one trial in patients and a few drug interaction studies doesn’t justify marketing exclusivity and a 50-fold increase in price.” As Allen puts it, we need “legislative remedies to improve the drug supply without costing the public an arm and a leg.”

In health care finance, the “cost-shift” hydraulic is a familiar model. When policymakers cut reimbursements for, say, Medicare or Medicaid, providers still have the same income target, and respond by raising prices for the privately insured. One scholar estimated that the privately insured pay over 120% of costs, while Medicare payments are between 95 and 99%. We might think of pharmaceutical patents as another manifestation of “cost-shifting,” from the future (which will enjoy drugs in the public domain) to the present (which must pay the monopolist’s price). Other forms of exclusivity can also lead to that type of cost-shift, as the Makena controversy makes clear. Perhaps the people most benefited by a regime of pharmacovigilance and evidence-based medicine should be asked to pay something for that new reassurance. But they shouldn’t be price gouged. A risk corridors approach might better balance patients’ interests in research on, and reasonable prices for, unapproved drugs.

Frank is Professor of Law at the University of Maryland. His research agenda focuses on challenges posed to information law by rapidly changing technology, particularly in the health care, internet, and finance industries.

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